Oil Markets: Everything Is About Weak Demand

Oil prices recovered
somewhat early on Friday morning, but handed in gains by noon as traders
continue to worry about the state of the global economy

Friday, October 4,
2019

Oil prices dropped sharply during trading on Thursday but
recovered on hopes of more aggressive action from the Federal Reserve. The U.S.
jobs report on Friday revealed more weakness, but it wasn't as poor as feared.
Geopolitical risk has receded from the top of minds of oil traders. Everything
is about weak demand now.

OPEC
production fell most in 16 years in September. Largely
due to the Abqaiq attack, OPEC's oil production fell sharply in September. It was the
single-largest disruption in history when it occurred, although its short
duration meant that the outage fell short of the PDVSA strike in 2002 in terms
of total volumes lost. Still, oil prices languish as demand continues to
weaken. "Oil-demand growth is hitting the skids as macroeconomic, trade, and political
risk drivers continue to intensify, from Brexit to impeachment through Persian
Gulf conflict risk and the U.S.-China trade war," Bob McNally, president of
Rapidan Energy Group, told Bloomberg.

Unrest
in Iraq puts spotlight on oil. Iraqi security forces
have tried to violently suppress widespread protests in the country, and there
is little sign of a resolution. Oil production has not been affected yet.

U.S.
SPR more limited than expected. The U.S. strategic
petroleum reserve is thought to be a massive trove of oil that can be readily
deployed. For instance, in a hypothetical outage in the Strait of Hormuz, the
U.S. should be expected to withdraw 3.5 mb/d of oil from the SPR. But the
reserve might not be able to pull that off. Changes in pipeline flows, and huge
increases in upstream production mean that only about 1.5 mb/d can be drawn
down at a time, according to Platts.

Volkswagen
to spend $2.2 billion on EVs. Volkswagen's Traton
truck division plans to spend 2 billion euros ($2.2 billion) over
the next five years on EVs.

Investor
group urges climate action. Climate Action 100+, a
group of investors overseeing $35 trillion, says that of the most polluting companies
in the world, only about 9 percent have aligned their operations with the Paris
Climate Agreement. The investor group has already pressured oil companies,
including Royal Dutch Shell (NYSE: RDS.A) and BP (NYSE: BP) to
take more aggressive action.

Exxon
and Shell issue profit warnings. ExxonMobil
(NYSE: XOM) and Royal Dutch Shell (NYSE: RDS.A) both
issued profit warnings this week ahead of their third quarter reports later
this month. Exxon said its earnings would be around 50 percent lower than the
same quarter last year, largely due to lower oil prices.

Ecuador
to leave OPEC. Ecuador said that it would leave OPEC in January
due to fiscal problems.

Norwegian
sovereign wealth fund to sell $6 billion in oil and gas stocks. After
a two-year process, the sovereign wealth fund in Norway received approval to move forward with a $5.9 billion
sale of oil and gas stocks.

Iran
says French plan for talks with U.S. "broadly acceptable." Iranian
President Hassan Rouhani said that the French proposal to restart negotiations between Iran and
the U.S. was "broadly acceptable." They include Iran refraining from work on
nuclear weapons and also helping to improve security for the region. In
exchange, Iran would receive sanctions relief. Still, Rouhani said that mixed
messages from the U.S., including President Trump saying publicly that he would
escalate sanctions, undermined the possibility of talks.

Russia's
Rosneft wants payment in euros. Russia's Rosneft
is asking buyers of an oil cargo to pay in
euros. "This could be a step to reduce U.S. dollar exposure, which makes sense
for Russia, given the sanctions risk," said Carsten Fritsch, an analyst at
Commerzbank AG.

Chevron
using joint ventures to scale up in Permian.Chevron (NYSE:
CVX) is relying on joint ventures and partnerships to help
scale up production in the Permian basin, according to Reuters. For instance, Chevron has a joint
venture with Cimarex Energy (NYSE: XEC), which has been profitable
since 2016. Chevron also has dozens of other agreements with other shale
players in Texas and New Mexico. The model gives Chevron a share of the oil,
but often relies on other companies to lead on drilling.

Pennsylvania
joins cap-and-trade. The largest polluting state in
the U.S. northeast will join RGGI, a regional cap-and-trade
program with the mid-Atlantic and northeast. Entering the carbon market will
put a cap on emissions from power plants, and utilities will have to buy and
sell credits to comply. The measure could put more coal plants at risk.
Pennsylvania regulators will have until July 2020 to draw up rules to join.

More
signs of financial stress for Permian drillers. Private-equity-backed
American Energy-Permian Basin LLC convinced creditors to restructure $2 billion in debt, helping the
company to avoid bankruptcy. The company was founded by the late Aubrey
McClendon, and the company missed an interest payment in May. Meanwhile,
micro-cap driller Abraxas (NASDAQ: AXAS) said
it was suspending drilling operations in the Delaware basin.

Chevron
says it will cut emissions. Chevron (NYSE:
CVX)said that it would cut greenhouse gas
emissions by 5 to 10 percent from its upstream oil operations and by 2 to 5
percent in natural gas operations from 2016 to 2023.

Washington
law impacts oil-by-rail to west coast. Phillips 66
(NYSE: PSX) has curtailed shipments of Bakken oil to its
refinery in Washington State because of a law limited vapor pressure in oil-by-rail
cargoes. A Phillips 66 refinery manager said that law is having a "significantly negative impact to refinery profitability."

Sec.
of Energy Rick Perry to resign. The U.S. Secretary of
Energy Rick Perry is set to step down before the end of the year. Perry
took a trip to Ukraine in May and that trip is starting to receive scrutiny
from the impeachment inquiry in Washington.

BP
names successor to Dudley. BP (NYSE:
BP) announced that Bernard Looney, head of the
company's upstream unit, will take over from Bob Dudley when he retires next
year.

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